Taking Care of Finances During Divorce

If you’re divorcing, it’s good to look at your finances in detail as early as possible.

Being proactive about shared debt can help you maintain good credit.

When you have a good understanding of your debt and assets, you can discuss dividing them.

Divorce on the horizon?

A divorce is obviously an emotionally charged time for you and your family. Because you’re juggling so many arrangements, you might decide to wait to work out financial details during your final divorce settlement.

However, most divorce attorneys actually suggest thinking about how to divide your financial responsibilities as early as possible — particularly if you have shared debt.

Look at shared debt

With the help of a mediator and/or your Financial Advisor, you may be able to decide which of you will take which debts. You may consider paying off or closing any credit accounts before you divorce.

Most states allow you to settle debt issues between you. If you can’t come to an agreement and the court has to decide for you, the divorce can get very complex and expensive.

Another reason to be proactive about your shared debt: it can help you both maintain good credit ratings after your split and, perhaps most important, prevent uncomfortable conversations about unresolved debts with your ex-spouse in the future.

Pay attention to your credit score and any joint credit cards. You should both agree to stop using joint cards, but it’s important to keep tabs and make sure that’s actually happening.

Get help as soon as you consider a separation

If you can’t come to an agreement and the court has to decide for you, the divorce can get very complex and expensive.

Meet with your Financial Advisor at the first hint of impending separation. A good Financial Advisor will be compassionate and willing to remain neutral if he or she serves both you and your soon-to-be-ex. He or she should also be fully supportive if you or your spouse decides to seek the guidance of separate advisors. In all likelihood, he or she will have advised divorcing couples in the past.

Your advisor can revisit your investment portfolio and do a cash-flow analysis to illustrate what you might draw as future income. Your advisor can also offer advice about which shared debts might be best for you to take on (or avoid), given the amount of risk with which you are comfortable.

Start with your credit report

The smartest way to begin reviewing your debts is to request a copy of your credit report so you can verify which liabilities are in your name. If your spouse is willing to share his or her credit report, that can help you get a full breakdown of all shared debts. Your obligations might include assets such as a primary home, vacation home, vehicles, credit cards and lines of credit, family business–related debt, and possibly student loan debt.

Once you have a full picture of your debts and assets, you can discuss dividing them. For instance, one of you might keep your primary home while the other takes your mountain cabin.

What about the house?

Many divorcing women want to keep the matrimonial home whenever possible, especially when children are still living at home. The spouse who keeps each home should also take responsibility for its loan, refinancing it in their name if at all possible.

Information is important to handling debt well during a divorce

One situation where you might have to continue working together with your ex-spouse on a shared debt is if you have an unresolved tax obligation. You should talk to the IRS about setting up separate payments on that joint debt.

You may not agree on how to split contentious debts, such as secret credit card debt created by your spouse. In that case, your state’s laws will come into play. For instance, in most states, ownership of debts is decided by “equitable distribution.” A judge or mediator assigns debts to spouses according to factors such as who signed for it, got greatest value from it, or has the larger income.

Separate debts into your individual names when you divorce

It’s important to understand, though, that your obligation to your financial institution is completely separate from any obligations to your ex-spouse resulting from your divorce decree.

For example, the wife gets the house in a divorce settlement and agrees to pay the mortgage. If she doesn’t make the payments and her ex-husband is still jointly listed on the mortgage, he is still responsible for the debt. His credit rating and ability to get future loans can be compromised, and the bank could sue him for collections.

Overall, information is the most important key to handling debt well during a divorce. Collect tax returns, credit reports, and bank and brokerage statements as early as possible. The more you know about your marital finances, the easier it will be for you to negotiate over outstanding debts at the settlement table.

Next steps

If divorce is inevitable, start looking at you finances to help protect your financial future.

Engage a trusted team of your own advisors — Financial Advisor, attorney, and tax advisor.

Get a copy of your credit report and keep an eye on your credit score.